Conceptual Issues in Calibrating the Basel Iii Countercyclical Capital Buffer

28 Pages Posted: 2 Jun 2019

See all articles by Torsten Wezel

Torsten Wezel

International Monetary Fund (IMF)

Date Written: May 2019

Abstract

This paper discusses issues in calibrating the countercyclical capital buffer (CCB) based on a sample of EU countries. It argues that the main indicator for buffer decisions under the Basel III framework, the credit-to-GDP gap, does not always work best in terms of covering bank loan losses that go beyond what could be expected from economic downturns. Instead, in the case of countries with short financial cycles and/or low financial deepening such as transition and developing economies, the Basel gap is shown to work best when computed with a low, smoothing factor and adjusted for the degree of financial deepening. The paper also analyzes issues in calibrating an appropriate size of the CCB and, using a loss function approach, points to a tradeoff between stability of the buffer size and cost efficiency considerations.

Keywords: Credit booms, Developing countries, Bank credit, Credit, Bank capital, Macroprudential Policy, Procyclicality, Basel III, CCB, RWA, buffer size, transition economy, regression

JEL Classification: C20, G2, E52, E01, K2, E63, G21

Suggested Citation

Wezel, Torsten, Conceptual Issues in Calibrating the Basel Iii Countercyclical Capital Buffer (May 2019). IMF Working Paper No. 19/86, Available at SSRN: https://ssrn.com/abstract=3397544

Torsten Wezel (Contact Author)

International Monetary Fund (IMF) ( email )

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